A firm whose home currency is the Mexican Peso (MNX) is considering an investment in the...
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A firm whose home currency is the Mexican Peso (MNX) is considering an investment in the United States. The investment is expected to produce after-tax United States dollar (USD) cash flows (in millions) as follows: Year 0: -USD350 Year 1: USD151 Year 2: USD162 Year 3: USD173 Year 4: USD184 The expected rates of inflation are constant at 7.55% in Mexico and 3.33% in the United States. The required returns for projects in this risk class are 18% in Mexico and 11% in the United States. The spot exchange rate is MNX20.81/USD. The project country's government has United States dollar-denominated bonds outstanding that currently yield 4.84% per annum. The Mexican firm pays a marginal corporate tax rate of 20% on its USD profits, which is the same marginal tax rate that your firm pays on its parent company profits in the Mexican peso. The US Government has a FDI policy stipulating that for all foreign projects, the first 3 years of USD cash flows generated by the project must be loaned to the country's government at an interest rate of 0% per annum for a period of exactly 3 years after they are generated by the project. What is the NPV (in millions) of the project assuming there is no risk of blocked funds by the US Government? (2 marks) What is the value of the side effect brought about by the blocked funds? A firm whose home currency is the Mexican Peso (MNX) is considering an investment in the United States. The investment is expected to produce after-tax United States dollar (USD) cash flows (in millions) as follows: Year 0: -USD350 Year 1: USD151 Year 2: USD162 Year 3: USD173 Year 4: USD184 The expected rates of inflation are constant at 7.55% in Mexico and 3.33% in the United States. The required returns for projects in this risk class are 18% in Mexico and 11% in the United States. The spot exchange rate is MNX20.81/USD. The project country's government has United States dollar-denominated bonds outstanding that currently yield 4.84% per annum. The Mexican firm pays a marginal corporate tax rate of 20% on its USD profits, which is the same marginal tax rate that your firm pays on its parent company profits in the Mexican peso. The US Government has a FDI policy stipulating that for all foreign projects, the first 3 years of USD cash flows generated by the project must be loaned to the country's government at an interest rate of 0% per annum for a period of exactly 3 years after they are generated by the project. What is the NPV (in millions) of the project assuming there is no risk of blocked funds by the US Government? (2 marks) What is the value of the side effect brought about by the blocked funds?
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To calculate the NPV of the project we need to discount the projected cash flows to their present va... View the full answer
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Accounting What the Numbers Mean
ISBN: 978-0073527062
9th Edition
Authors: David H. Marshall, Wayne W. McManus, Daniel F. Viele,
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